A Japanese investment bank has admitted it was part of a controversial deal with Goldman Sachs to buy Venezuelan government bonds.Nomura Securities said it also bought about $100m worth of the bonds last week, according to Reuters reports.
. . .
Reuters reported that Nomura said its purchase had cost $30m.
Goldman said its asset-management arm acquired the bonds “on the secondary market from a broker and did not interact with the Venezuelan government”.
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Even at 31 cents on the dollar, Nomura is taking a risk buying the bonds. In November, its own head of Latin America fixed-income strategy, Siobhan Mordan, warned investors: “The bottom line for bondholders is not if, but when is the timing for debt default?”

Goldman Sachs, apparently, was unaware that: 1) Historically, when a political party is forced out through revolution, coup, or other extralegal means, the new government does not always pay the debts incurred by the old one, and 2) It is strategically beneficial to the opposition party in Venezuela to deny payment to Goldman Sachs.

Wald assumes the current regime can be ousted, Maduro or no Maduro. For the time being, that’s unlikely.

Nomura was approached by the same intermediary, the London subsidiary of a small broker, Dinosaur Merchant Bank Ltd., some of the people said.

Goldman bought the bonds for an emerging-market fund it manages on behalf of outside investors. Nomura bought the bonds through its broker-dealer, which will seek to sell them to clients at a higher price in the coming weeks, the people said.

The New York-based bank’s asset management division last week paid 31 cents on the dollar, or about $865 million, for bonds issued by state oil company Petróleos de Venezuela SA in 2014, which mature in 2022, according to five people familiar with the transaction. The price represents a 31% discount on the trading Venezuelan securities maturing the same year.

The investment comes as Mr. Maduro’s detractors lobby hard to block Western financial institutions from doing transactions that support the cash-strapped government, which has been accused by the U.S. and other countries of widespread rights abuses.

Apparently GS is betting that a change in government would double the bonds’ value.

Good luck with that.

This move is peanuts in GS’s $40 billion emerging markets amount out of the $1.3 trillion the asset management branch manages, but Frank Muci at Caracas Chronicles calls it Meth Finance: “It’s like ripping out the electric wiring from the walls of your own house to sell the copper and get your next crystal meth fix.”

The government raised $865 million cash by selling $2.8 billion in previously untapped PDVSA bonds held by the Central Bank. The central bank got just 31 cents on the dollar for the bonds from Goldman Sachs’s asset management arm.
. . .
in return for $865 million now, the government committed to dishing out a total of $3.65 billion through 2022, split between $2.8 billion in principal and $756 million in interest. It’s unbelievable. The government now has to fork up the $865 million three times over by 2022 to make good on the $2.8 billion in bonds —and has to pay a crippling $756 million interest on top of that.

The deal has an “internal rate of return” of 48%. That means this is equivalent to taking out a loan at 48% interest… in dollars!

As long as someone is willing to be part of the debt pyramid scheme, it’ll continue. Let’s hope it’s not the U.S.

On Tuesday, Ecuador announced that it had swapped 1,165 bars of gold with Goldman. The gold is worth nearly $600 million, based on current prices. Goldman GS 1.76% , in return, is giving the Ecuadorians “instruments of high security and liquidity,” which is likely cash or something close to it.

And Ecuador gets to keep its gold. As part of the deal, three years from now, the two will reverse the swap. Ecuador gets its gold back. And Goldman gets the going price for 1,165 yellow bars in 2017.

. . . there are a few ways Ecuador could end up making $20 million on the deal. Ecuador could be betting that the price of gold will fall 20% over the next three years. Another way would be for Ecuador to take the cash it gets from the swap and invest it elsewhere in something that will make 20% over the next three years, not an easy task given that the average bond is yielding just 1.8%.

Or Ecuador could have done another swap, this time with the dollars it received from Goldman for Ecuadorian bonds. It would, of course, have to pay Goldman another fee for that. But that swap would pay the spread between U.S. three-year interest rates at about 0.85%, and Ecuadorian interest rates, which are around 7% or 8%, or a little over 20% during the three years.

So, then, why isn’t everyone doing Ecuadorian swaps? I mean, it’s guaranteed money. For one, the fee that Goldman or anyone else charges to do these deals must be pretty high. Also, if Ecuador defaults, you lose all your money, and you still have to repay the swap.

And Ecuador has recently defaulted, sort of. Five years ago, Ecuador tricked its lenders into thinking it was going to default on its debt. It told banks and investors that it didn’t think it would be able to repay about $3 billion in bonds. Those bonds, as you would expect, plunged in value to about $0.30 for every dollar Ecuador had borrowed.

Once the bonds plunged in value, Ecuador started buying them, eventually snapping up 90% of the much cheaper bonds. The move wiped out the debt and saved the country nearly $2 billion, which was also how much the banks and investors lost on those bonds.

Ecuador agreed to transfer more than half its gold reserves to Goldman Sachs Group Inc. for three years to give the government easier access to cash.

Money quote (emphasis added):

The deal comes as the South American country’s government, which defaulted on about $3.2 billion of bonds five years ago, seeks to cover a budget deficit forecast by the Finance Ministry to swell to a record $4.94 billion this year. President Rafael Correa said in April he also planned to sell about $700 million of foreign debt this year in the country’s first international bond sale since the 2008 and 2009 default.

“2.Revolving Door Ban — All Appointees Entering Government. I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts.

Ms. Rominger comes to the SEC from the asset management industry, where she worked for the past 11 years at Goldman Sachs Asset Management and most recently served as the firm’s global chief investment officer.

Well, at least she’s not the genius who masterminded the Facebook flop. Or at least one hopes so.